India: Inflation accelerates in October – ING

In view of Prakash Sakpal, Economist at ING, with India’s rising inflation and widening trade and fiscal deficits the current uptrend in the government bond yields and the USD/INR is your friend.

Key Quotes

“In line with our forecast, CPI inflation accelerated to 3.6% YoY in October from 3.3% in September on higher food and utilities prices. The WPI inflation also accelerated to 3.6% from 2.6% over the same months (INGF: 3.1%, consensus: 3.0%), and with same underlying drivers, though oil remains the principle driver for the wholesale prices.”

“The haphazard GST implementation is new hurdle in recovery of consumer spending after a hit from demonetisation a year ago. This may keep demand-pull inflation pressure in check but the supply-push from pass through of rising global crude oil price to domestic fuel prices and increase in imported inflation due to weak currency will keep inflation risk alive. The transmission mechanism from WPI inflation to CPI inflation may have been weak in the down cycle but it’s less so in the up cycle.”

“We expect CPI inflation to hit the low end of the RBI’s 4.2-4.6% 2HFY17/18 forecast in November and accelerate close to the top end by the end of the financial year in March. Inflation data reduce scope of RBI easing to support growth as some market players are contemplating. We forecast no change to the RBI policy until after 2018. With rising inflation and widening trade and fiscal deficits the current uptrend in the government bond yields and the USD/INR is your friend.”